Friday, 01 April 2016

Professor Paul Kerin photo
Professor Paul Kerin
Head of the School of Economics, University of Adelaide

    Not-for-profit (NFP) directors must address numerous issues, not least of which is fundraising, writes Professor Paul Kerin.

    Challenges facing NFP boards

    Most of my columns focus on the for-profit sector, but many readers have asked me what economic research says about NFP boards.

    NFPs lead the way in some areas; for example, their female board representation is double that of for-profits. However, NFP boards face even greater challenges than their for-profit counterparts.

    While NFP and for-profit boards have many formal responsibilities in common, there are important differences. For instance, NFP and for-profit directors rate the relative importance of their responsibilities quite differently.

    For-profit directors typically nominate CEO-related duties (hiring/monitoring/firing and succession-planning), monitoring financial performance and reviewing organisational strategy as their most important responsibilities, in that order. In contrast, in surveys, NFP directors put reviewing strategy first, monitoring financial performance a distant third and CEO-related duties even further down the list.

    Time devoted to fundraising means less time for other responsibilities.

    One reason for this is that NFP directors have an additional duty that for-profit directors don’t have: fundraising. NFP directors rank this as their second most important responsibility, with about half reporting they are expected to fundraise.

    Time devoted to fundraising means less time for other responsibilities. This, and the fact that financial performance is not an NFP’s raison d’etre, means monitoring finances is given less attention, with the focus on ensuring financial sustainability.

    NFP directors attach a higher relative importance to organisational strategy because they recognise it represents a bigger challenge for NFPs. Additionally, the payoff for getting it right is high.

    For-profit boards have a huge advantage: a clear and measurable overarching goal to maximise shareholder returns. In contrast, NFP boards often inherit a statement of purpose that is very high level, or has become outdated with the passage of time. Research suggests overcoming this disadvantage is the most important thing NFP boards can do to maximise their effectiveness. In particular, an NFP board must articulate a clear, overarching goal that is meaningful to all stakeholders. They must also define specific metrics than can be monitored to assess performance unambiguously against this overarching goal.

    It sounds simple but it is actually very challenging. The task of converting or updating a high-level purpose into a clearly stated overarching goal with specific metrics is not easy. I have struggled with that dilemma myself on several NFP boards, but also found the benefits of resolving the dilemma are substantial.

    The fact that it isn’t easy is reflected in NFP directors’ responses to survey questions. One-third say they don’t understand their organisation’s mission and strategy, while more than half say the data and information they receive do not enable them to accurately assess success against their organisation’s mission. Of course, some for-profit directors give similar responses to those same questions, but they are relatively fewer in number.

    Some research findings are consistent between NFPs and for-profits. While researchers can directly examine the links between shareholder value and for-profit characteristics, they can’t easily measure NFPs’ performance against overarching goals. Therefore, they have to use indirect measures, which are less definitive. Nevertheless, indirect measures such as director board meeting attendance rates suggest optimum director tenure for NFPs is similar to that of for-profits, which is eight to 12 years.

    However, there are other differences. NFP boards are larger, receive lower-quality information and spend less time on succession planning. These differences may well be optimal because NFP directors have a broader set of responsibilities and because NFPs are typically smaller. However, in some cases these differences may reflect the negative side effects of NFPs not resolving their overarching goal, and the difficulties of arriving at accurate metrics.

    I’d recommend NFP boards ask four questions. Do we have a clearly articulated overarching goal? Is it meaningful to stakeholders? Have we set specific metrics aligned to the goal? Do we monitor metrics and take action?

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